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RE business in Chennai collapsing

Last updated: August 17 2009
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  • Re : RE business in Chennai collapsing

    Originally posted by nabishek View Post
    Dear Wiseman,

    I came across some interesting articles, which talks about the volumes and corrections thats already happening.



    It says that the real correction/decline thats happened since last quarter is not clear because there's no significant sale happening.

    Another Interesting article is as follows which reiterates what you have been predicting so long.



    I have a doubt regarding the "reversal to the mean" logic.Hope you could clarify.

    without getting too mathematical about it.To plot a normal distribution graph none of the data like mean,variance or standard deviation is easily for available RE.

    So plotting two line graph, one for the mean and the other for the market rate against years(time).we can observe that the market rate is way above the mean.

    You are suggesting that the market rate will swing below the mean before stabilizing and overlapping again at the mean.

    I feel that since the correction is not continous and linear we may see lot of plateau regions where the price stagnates for years while the mean catches up with the market rate.

    Has this swing below the mean happened before?And was sale happening at that price?

    The reason why I ask this is, if RE price rides on the mean, it would become the most safest investment with zero variance and totally risk free.It sounds too good to be true.
    Very good link Abishek.Your last point really made lot of sense.
    Sellers holding land in city will argue price will decrease only in suburb.Those holding lands in suburb will argue price of flats in suburb will only decrease and those holding flats in suburb will argue prices will not decrease at all.Time to accept the reality that price will fall everywhere irrespective of the location.

    Comment


    • Re : RE business in Chennai collapsing

      I think reversal to the mean makes sense when compared with a time period. For instance in the case of stocks you compare the current price of a stock over 50 day moving average, 100 day moving average etc.

      On similar lines if you consider 10yr, 50 yr.. moving average line of real estate you will see that the current real estate prices are way out of whack.

      This link http://www.financegurukul.com/2009/0...s-home-prices/ shows the comparison with Japan for US and UK real estate markets. Japan we have been there done that, so we know how that played out. US and UK is a train wreck taking place in front of our eyes in slow motion.

      Coming to the Indian markets, i would be willing to place my bets that the experience will be similar if not same.

      cheers

      Comment


      • Re : RE business in Chennai collapsing

        Dear friend,

        If the prices fall, every prospective buyer will be happy. If it happens soon, the buyers will be more happy and will go in for their dream flats.

        ks2071746

        Comment


        • Re : RE business in Chennai collapsing

          An interesting observation!

          Originally posted by nabishek View Post
          Dear Wiseman,

          I came across some interesting articles, which talks about the volumes and corrections thats already happening.

          It says that the real correction/decline thats happened since last quarter is not clear because there's no significant sale happening.

          Another Interesting article is as follows which reiterates what you have been predicting so long.

          I have a doubt regarding the "reversal to the mean" logic.Hope you could clarify.

          without getting too mathematical about it.To plot a normal distribution graph none of the data like mean,variance or standard deviation is easily for available RE.

          So plotting two line graph, one for the mean and the other for the market rate against years(time).we can observe that the market rate is way above the mean.

          You are suggesting that the market rate will swing below the mean before stabilizing and overlapping again at the mean.

          I feel that since the correction is not continous and linear we may see lot of plateau regions where the price stagnates for years while the mean catches up with the market rate.

          Has this swing below the mean happened before?And was sale happening at that price?

          The reason why I ask this is, if RE price rides on the mean, it would become the most safest investment with zero variance and totally risk free.It sounds too good to be true.

          When you plot prices (y-axis) over time (x-axis), you get a scattered plot. Generally a best-fit trendline is drawn and this is considered the mean (this is not adjusted for inflation). This line takes on increasing significance when the plot is over a long period of time (say 100 years).

          So, reversal to the mean means prices falling back to connect with the line projected to that point in time. In countries like India this line slopes upwards from left to right, meaning future prices always are higher than past prices - generally!

          The key point is the word "generally". Sometimes prices rise so fast and so much that when the rise is exhausted, prices will fall back. As you said, after an initial fall it may simply stagnate to wait for the mean to catch up!

          This catch up situation generally happens only in shallow recessions, when people's purchasing power gets only slightly eroded.

          This time, my bet is that, people's purchasing power is going to get seriously eroded over time. So, holding power too will fall sharply and over several years. Therefore, this time the price may not stagnate. It may simply fall all the way to the mean and maybe even beyond. Whats worse! It may even stay below the mean for a longer period, before energy (purchasing power) returns to the market.

          cheers

          Comment


          • Re : RE business in Chennai collapsing

            Originally posted by wiseman View Post
            When you plot prices (y-axis) over time (x-axis), you get a scattered plot. Generally a best-fit trendline is drawn and this is considered the mean (this is not adjusted for inflation). This line takes on increasing significance when the plot is over a long period of time (say 100 years).

            So, reversal to the mean means prices falling back to connect with the line projected to that point in time. In countries like India this line slopes upwards from left to right, meaning future prices always are higher than past prices - generally!

            The key point is the word "generally". Sometimes prices rise so fast and so much that when the rise is exhausted, prices will fall back. As you said, after an initial fall it may simply stagnate to wait for the mean to catch up!

            This catch up situation generally happens only in shallow recessions, when people's purchasing power gets only slightly eroded.

            This time, my bet is that, people's purchasing power is going to get seriously eroded over time. So, holding power too will fall sharply and over several years. Therefore, this time the price may not stagnate. It may simply fall all the way to the mean and maybe even beyond. Whats worse! It may even stay below the mean for a longer period, before energy (purchasing power) returns to the market.

            cheers
            Thanks for the detailed response, wiseman.

            As wealth gets eroded, Purchasing power and confidence will also be crushed.The middle class/upper middle class who depended solely on the newly created jobs and all those who were enjoying the globalization effect will surely be affected.

            Rediff carries an interesting article, which shows how the fastest growing states are also the highest debt ridden ones, guess they too got carried away and over-leveraged.

            Growth came at a cost, DEBT!

            Rank: 7

            State: Tamil Nadu

            Debt position (2006-2007): Rs 68,655 crore (Rs 686.55 billion)

            State income (2005-2006): Rs 194,528 crore (Rs 1,945.28 billion)

            Per capita income (2005-2006): Rs 29,958

            Population (2001 census): 6.211 crore (62.11 million)

            Population below poverty line (2004-2005): 22.5 per cent

            Infant mortality rate (2006): 16 per 1,000

            Comment


            • Re : RE business in Chennai collapsing

              Originally posted by nabishek View Post
              Dear Wiseman,

              I came across some interesting articles, which talks about the volumes and corrections thats already happening.



              It says that the real correction/decline thats happened since last quarter is not clear because there's no significant sale happening.

              Another Interesting article is as follows which reiterates what you have been predicting so long.



              I have a doubt regarding the "reversal to the mean" logic.Hope you could clarify.

              without getting too mathematical about it.To plot a normal distribution graph none of the data like mean,variance or standard deviation is easily for available RE.

              So plotting two line graph, one for the mean and the other for the market rate against years(time).we can observe that the market rate is way above the mean.

              You are suggesting that the market rate will swing below the mean before stabilizing and overlapping again at the mean.

              I feel that since the correction is not continous and linear we may see lot of plateau regions where the price stagnates for years while the mean catches up with the market rate.

              Has this swing below the mean happened before?And was sale happening at that price?

              The reason why I ask this is, if RE price rides on the mean, it would become the most safest investment with zero variance and totally risk free.It sounds too good to be true.
              The first article in Hindu clearly shows what has happened and will happen in every boom bust scenario in RE in Chennai. During the bust the price of prime land remains static with lesser transactions and with some move upwards, the price of lands in outskirts becomes unsaleable. It will however boom in the next cycle to a level that will justify its purchase with a CAGR of 20%.
              Now flats are a different ball game and this time they have been bought by foolish folks with BORROWED MONEY. SO the second article is showing the story of one such fella. Well even those type of apartments dont seem to be falling in Bangalore or Chennai. Yet an Adarsh palace is being quoted at 1.4cr for a 1800sft 3bd apartment. Strange though are the ways of RE and the ways of the silly bears!

              Comment


              • Re : RE business in Chennai collapsing

                Bear Amusement

                Many of these bear writers might benefit from past experience. Around the place I live about 10+years ago a builder started a project. He got into trouble. Till today that property is standing uncompleted. No trace of builder! Just that some stray folks use that as their living space!
                That is what happens to these unbuilt properties of DLF and the one mentioned by the Delhi guy in that link by Nabhishek. In other words many builders will disappear and many projects will die.
                Does it mean the locality goes into trouble. NOT ONE BIT. All the other empty pieces of land in this locality are filled to the brim and not a piece is available. However this MOTTAI GOPURAM (incompleted castle!) is yet remaining as it is.
                Moral: Buy something you can possess. Dont buy fiction.
                Corollary: If you buy land, you atleast have it, if you buy a completed flat you certainly have it. If you buy a dream then you lose it once you wake up. All the OMR projects were dreams!
                Future:After a bust, land prices will actually soar since people will get something to hold. Completed flats will become premium properties. Incompleted flats will remain as is.
                Does this mean RE is not a good investment?
                Well Bears will continue with their old Kirukku argument. So I leave!

                Comment


                • Re : RE business in Chennai collapsing

                  This time I hope its for good, unlike last time 'crying wolf'

                  Originally posted by Natarajg007 View Post
                  Many of these bear writers might benefit from past experience. Around the place I live about 10+years ago a builder started a project. He got into trouble. Till today that property is standing uncompleted. No trace of builder! Just that some stray folks use that as their living space!
                  That is what happens to these unbuilt properties of DLF and the one mentioned by the Delhi guy in that link by Nabhishek. In other words many builders will disappear and many projects will die.
                  Does it mean the locality goes into trouble. NOT ONE BIT. All the other empty pieces of land in this locality are filled to the brim and not a piece is available. However this MOTTAI GOPURAM (incompleted castle!) is yet remaining as it is.
                  Moral: Buy something you can possess. Dont buy fiction.
                  Corollary: If you buy land, you atleast have it, if you buy a completed flat you certainly have it. If you buy a dream then you lose it once you wake up. All the OMR projects were dreams!
                  Future:After a bust, land prices will actually soar since people will get something to hold. Completed flats will become premium properties. Incompleted flats will remain as is.
                  Does this mean RE is not a good investment?
                  Well Bears will continue with their old Kirukku argument. So I leave!

                  Not asking you to leave, Nats. After al, its everyone's forum. But I'm confused about this flip-flop behavior of yours. Leaving, not leaving.

                  I recollect last time you did one sob story and said you were leaving for good. Only, it was a case of crying wolf as you were soon back with your "weekend banter" post, a slick way of returning without raising too much of dust!

                  This time too, you are talking of leaving. Is it for good?

                  Just asking!!!

                  cheers

                  Comment


                  • Re : RE business in Chennai collapsing

                    Originally posted by Natarajg007 View Post
                    The first article in Hindu clearly shows what has happened and will happen in every boom bust scenario in RE in Chennai. During the bust the price of prime land remains static with lesser transactions and with some move upwards, the price of lands in outskirts becomes unsaleable. It will however boom in the next cycle to a level that will justify its purchase with a CAGR of 20%.
                    Now flats are a different ball game and this time they have been bought by foolish folks with BORROWED MONEY. SO the second article is showing the story of one such fella. Well even those type of apartments dont seem to be falling in Bangalore or Chennai. Yet an Adarsh palace is being quoted at 1.4cr for a 1800sft 3bd apartment. Strange though are the ways of RE and the ways of the silly bears!
                    More Than 50% Homes Built in Six Major Cities in 2007 Remain Unsold
                    According to a leading real estate agency, more than half the houses built in six major cities over the last two years are lying unsold. Only 3.86 lakh homes out of the 8.21 lakh built in the last two years in the Mumbai Metropolitan Region (Mumbai, Thane and Navi Mumbai), National Capital Region (Delhi, Faridabad, Gurgaon, Noida, Greater Noida and Ghaziabad), Bangalore, Chennai, Hyderabad and Pune found buyers, says a report by the Mumbai-based Liases Foras. The agency surveyed 5,810 apartments in residential projects in these cities in December and January.
                    20 March 2009 Indian Express

                    Comment


                    • Re : RE business in Chennai collapsing

                      Dear friends,

                      Both wise & nats ( in fact there are 2 nats ) should remain in this forum and contribute.

                      ks2071746

                      Comment

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